Question

Cecil c. seymour is a 64-year-old widower. he had income for 2022 as follows: pension from former employer interest income from alto national bank interest income on city of alto bonds dividends received from ibm stock held for over one year collections on annuity contract he purchased from great life insurance social security benefits rent income on townhouse $39,850 5,500 4,500 2,000 5,400 14,000 9,000 the cost of the annuity was $46,800, and cecil was expected to receive a total of 260 monthly payments of $450. cecil has received 22 payments through 2022. cecil’s 40-year-old daughter, sarah c. seymour, borrowed $60,000 from cecil on january 2, 2022. she used the money to start a new business. cecil does not charge her interest because she cannot afford to pay it, but he does expect to collect the principal eventually. sarah is living with cecil until the business becomes profit-able. except for housing, sarah provides her own support from her business and $1,600 in dividends on stocks that she inherited from her mother. other relevant information is presented below. • expenses on rental townhouse: utilities maintenance depreciation real estate taxes insurance $2,800

Answer 1

To calculate the future buying power of $20,000 given a 6% inflation rate over 16 years, use the formula FV = PV / (1 + i)^n, which indicates the purchasing power will decrease over time, affecting retirement planning.

Step-by-step explanation:

Understanding the Impact of Inflation on Future Buying Power

To determine how much buying power $20,000 will have in 16 years given an annual inflation rate of 6%, we need to calculate the future rise in price level over the said time period. The formula to calculate the decrease in purchasing power due to inflation is:

FV = PV / (1 + i)^n

Where:
FV is the future value of money after inflation
PV is the present value of money (the $20,000)
i is the inflation rate
n is the number of years

Using the formula, the buying power of $20,000 in today's dollars, given a 6% inflation rate over 16 years, is calculated as follows:

FV = $20,000 / (1 + 0.06)^16

By computing this, we can see that the future buying power will be significantly lower than the nominal value of $20,000. Hence, if Rosalie the Retiree receives $20,000 after 16 years, it will be worth less in terms of today's purchasing power, influencing her retirement planning decisions.